June 01, 2021 (MLN): With the current uncertainties related to Covid-19 that mutate or ravage the emerging markets, it is more dangerous to withdraw stimulus too soon rather than too late, said Dr Reza Baqir in an interview with Bloomberg.
Governor State Bank of Pakistan, Dr Baqir discussed important points regarding monetary policy in an interview.
Responding to a question about keeping the policy rate unchanged, he said, “Pakistan’s monetary policy stance is significantly accommodative. The current policy rate is seven percent while real interest rate ranges from about zero to -4 currently.”
“The meeting came upon a decision to maintain the current rates keeping in mind the high Covid uncertainty and the spike in inflation caused predominantly by energy and food prices which are likely to be one-off,” he said.
And last but not the least, the monetary policy meeting pertained to the forward guidance. MPC was of the view that in the absence of unforeseen circumstances the committee expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time.
“If there is demand-side pressure, then the committee may decide to moderate the extent of current accommodations”, Dr Baqir said while pointing that change will only be made if required.
Governor said, “In the current uncertainties with Covid-19 that is mutating or ravaging emerging markets, it’s more dangerous to withdraw stimulus too soon rather than too late.”
In three successive waves, the govt has been able to bring down the number of covid cases which was the very first element of govt strategy. Currently, for every million populations, Pakistan has about 12 new cases as of yesterday that compared to a global average of 62 new cases per million, he said.
When asked about the fiscal side particularly the disbursement of cash, he said, “The second element was cash transfer program i.e., Ehsaas Emergency Cash Transfer Program that has been recognized by the international agencies including World bank as one of the global successes.”
World Bank noted that it is amongst the top four programs in terms of the number of people reached and amongst the top three global programs in terms of the share of population reached. He said this program was one of the three elements of the government’s strategy to deal with the Covid.
“And then the finally the extensive monetary stimulus that was given by the central bank which was around 5% of the GDP while at the same time the fiscal policy was prudent,” he added.
When asked about the surprise GDP forecast of 3.94%, he said the central projected 3% but after seeing the recent data particularly on the farm output, the revised forecast for this year is also 3.9 and this comes upon a combination of two factors- the first is aggressive central bank stimulus largely relying on the quantitative measures and the second was a very prudent recalibration of government spending on the part of the fiscal authorities which injected a lot of cash as in the part of Ehsaas program.
Speaking of fiscal deficit, he said, unlike emerging markets where on average public debt to GDP grew by 10 percent, Pakistan's public debt to GDP was broadly unchanged in 2020 and therefore it supported market sentiments.
For a country that had a macro imbalance previously like a high level of public debt, this calibrated response, a combination of fiscal and monetary is one of the key factors that underpins the economic turnaround, he spoke.
In an interview with Bloomberg, he said inflation for the fiscal year would be close to 9% whereas Central Banks has made a forecast of 7-9% for the FY21. “One noticeable thing that happened in April was the sudden rise in inflation, reaching 11% and in the same fiscal year we witnessed 6% as well,” he further said.
Talking about the inflation outlook, he said the Central bank will take action if demand-side pressure appears, but currently the governor SBP does not see any such signs.
Responding to a question about the International Monetary Fund (IMF) program, the governor said that the IMF program is right now in the stage of pivoting from civilization to growth. Pakistan has successfully demonstrated as the current account deficit was around $19 billion in FY19, and now it has turned to a surplus of $900 million. SBP’s reserves were $7.2 billion on the balance sheet when the IMF program started and now today, they are at $16 billion.
“Pivoting to growth is critical for any national economic program because we have to demonstrate that the gains of stabilization are going to come to the people in the form of growth, that the stage we are -our 4% revised forecast of GDP demonstrates that the policy has been successful,” he concluded.
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